Most companies follow certain standards for keeping their books. The key standard is defined as double-entry bookkeeping, always requiring at least two entries for each transaction. In a simplified way it can be defined as: 'whenever something goes in one place, it has to be added in another one'. For example, if a company pays salaries, the amount would be booked from the bank account in the assets section to the position 'salaries' in the expense section.
More important though are valuation standards, which determine at what values are assigned to assets and liabilities in a company's books. The key principle agreed during the past 20-30 years was that they should be 'true and fair', representing the current reality of a company as well as possible.

Asset

Broadly speaking a physical or non-physical item that has a certain monetary value and is owned by an individual or a company. In accounting terms an element of the 'asset' portion of the balance sheet with an assigned value.

Asset Backed Security

A debt obligation that is directly tied to a pool of assets, such as real estate or cars. The issuer typically no longer carries any responsibility for the underlying loans' performance.

Audit

In companies, the periodic (typically annual) review of accounts, performed by external and independent audit firms. Big household names are Ernst & Young, KPMG, Deloitte. In a broader context, the term 'audit' is used for any kind of thorough and systematic review.

Bad Bank

A term created to describe a separate entity taking over troubled assets from banks. Bad banks may be run by banks themselves (and still consolidated in the balance sheet but without the Tier 1 capital requirements) or externally, for example by multiple banks together or by the government. The purpose is to separate normal 'sound' operations from legacy assets containing above-normal risks.

Balance Sheet

The status portion of a company's accounts. It shows the situation regarding assets and liabilities at a specific point in time. In contrary to the income statement, which covers a certain period (typically a quarter or a year) and shows activities, the balance sheet shows the status at the end of a period.
The balance sheet of the last period always creates the base for the next period, e.g. its contents are perpetual and continuous over time.

Baltic Dry Index

An index reflecting the price to ship bulk dry goods (for example commodities like grain, iron ore, coal etc). It is based on actual rates paid for four categories of ships and published daily.

A bubble in economy is often used as a term describing an exaggeration in the valuation of certain assets, such as stocks, real estate, commodities, etc., where prices paid (perceived value) rise much faster than those for other assets. Often, a bubble is widely recognized only once it bursts, leaving people who entered too late with tremendous losses.

Cassandra is a figure from ancient mythology. Able to see into the future, she warned her fellow Trojans of impending doom, but nobody believed her. Modern literary adaptions often stress the curse she was under - knowing that her often gloomy predictions, though ridiculed and disbelieved by her contemporaries, would eventually come true.

Central Bank

A central bank typically is in charge of the monetary policy of a country - or in the case of the European Union, for the entire Euro zone. Its responsibility is to ensure monetary stability for the region covered by means of a number of instruments, including interest rates, money supply and lending facilities to banks.
Most central banks in developed economies are government-independent.

A CDO is a security that typically consists of a pool of debt of any possible kind (such as mortgages, corporate debt, student loans, etc). Synthetic CDOs on top of that also include derivatives, for example Credit Default Swaps.
CDOs often are structured in multiple tranches with different priority, e.g. in case of defaults they get affected differently.

Commercial Paper

Short-term unsecured debt notes issued by large corporations or banks, focused on covering liquidity gaps for example to cover payrolls at months' end. They typically run from a few days to a couple of months. Currently, most commercial paper in the United States is guaranteed by the FDIC, as a response to the Lehman Brothers failure.

Credit Default Swaps can be compared to insurance against the loss on debt. The concept works as follows: An investor owning debt of a specific kind pays an annual fee to the 'insurance'. In case of the original debtor defaulting, the investor is entitled to receive his investment against the defaulted debt. The price of credit insurance is typically dependent on the rating of the original debtor. In addition to those transactions described above, CDS protection can also be purchased for speculative reasons, e.g. without owning the underlying debt.

This number defines the ratio between debt and equity, e.g. what relationship the two have to each other. Multiple definitions appear throughout various sources.

Debtor-in-possession Financing

A bridge loan granted to a company upon entering bankruptcy status (following a U.S. Chapter 11 filing). DIP Financing ensures the continuation of operations during the bankruptcy procedure and is treated as preferred debt, more senior than most existing and future debt, securities or equity.

Deficit Spending

A term often used for government spending based on public borrowing, which is aimed at the stimulation of demand and at accelerating an economy's recovery from recession

Deposit

Money handed to a bank by individuals or companies, typically bearing interest and serving as the means for banks to lend money. In most economies, deposits are insured to a certain level by government or private guarantee funds (e.g. the FDIC in the U.S.).

Derivatives

Derivatives are financial instruments that are 'derived' from another instrument, e.g. do not directly represent an underlying value. They exist as options on purchasing or selling stocks, bonds, currency or commodities, as Credit Default Swaps, as Synthetic Collateralized Debt Obligations and in many other forms, where the value of an underlying asset determines the value of the derivative contract.

A term typically used for a country which still has per-capita output (as measured in gross domestic product per capita) significantly below the one of leading countries, but well above those of underdeveloped nations. Another factor is a rapid growth process typically associated with manufacturing and service industries. Emerging economies include large nations like China, India or Brazil, but also most of Eastern European nations.

Equity

Typically, in companies, the amount of capital available to do business. Capital is provided by the company's owners, which can be individuals, other companies or a government entity - or a mixture of the above.
In case of listed companies, shares representing a portion of the capital, are openly traded in stock exchanges, whereas the majority of companies is held private, with no or very limited transactions in their share capital taking place.
What most investors don't really know is that a company's equity is the risk element in a company's balance sheet. During bad times, it gets used up first, as losses directly reduce equity (and reserves, if there are any). In case of a bankruptcy, almost always, the entire equity is lost, because all other debt is served first.

EROI

Energy Return on (Energy) Investment is a term used to describe the amount of energy required to produce an additional unit of energy. An EROI of 20 for example says that 20 energy units can be gained from an energy sourcing/manufacturing process using one unit of input energy.

Exponential growth is what we humans have experienced in almost all our ecosystem parameters during the past 250 years, in population, income, energy consumption, and many other things. It refers to the fact that even small constant growth rates translate to larger and larger real growth numbers. An example: If a species of animals starts with 100 individuals and grows at 2% annually, it takes 36 years until their number reaches 200. Within another 82 years they reach 1000. Approximately every 116 years, the population now grows by a factor of ten, and after only 466 years, the population reaches one million, and 1 billion after 582 years. This produces a curve that almost looks like a hockey stick, remaining flat for a long time and then suddenly continuing to an almost vertical trajectory. Exponential growth is the predominant type of growth in ecosystems without (energy) input constraints, but it only lasts until system boundaries are reached.

Export

Goods or services delivered from one country (exporter) to another (importer).

Financial Services

Typically used for a group of companies with activities related to finances, including banking, investment and insurance.

Goodwill

Goodwill is an intangible asset in the balance sheet of a company not related to anything that can be described, measured or sold. Typically it represents the accumulated value of past acquisitions. Please also see our article on "Goodwill - very bad at bad times"

Great Depression

In economic context, a term used for the period between 1929 and the following 5-15 years (depending on country), showing a massive contraction of economic output, high unemployment and other signs of economic stress for individuals and companies. There is no exact definition of 'depression' in economic terms, contrary to 'recession', which has a clear definition accepted by most scientists.

Gross Domestic Product (GDP)

GDP is one of the key measures for a country's economic output, measuring the total value of all goods and services produced. It is typically calculated as the sum of consumption, (gross) investment plus government spending and the trade balance (exports minus imports) of a country.

Hedonic Pricing is an approach used for the calculation of output in an economy. To use a simple example: In the United States' GDP measures, a personal computer purchased in 2009 is not put in at its nominal cost, but with a higher value. This is based on an adjustment made for the increased processing power and storage when compared with a PC 10 or 20 years ago, assuming that additional computing power and storage will have a higher value than the price tag of the item purchased. A substantial portion of annual GDP growth during the past decade is attributed hedonic pricing and is heavily questioned by a number of economists.

Holding Company

A company owning other companies. Often, the holding company has no business activities on its own and serves the sole purpose of managing a portfolio of companies.

Home Equity Loan

A loan on a home which can be used for various purposes (such as education, consumption, purchases, etc). The home serves as collateral for the loan.

Housing Crisis

Most often this term refers to the significant reduction of house price values in the United States that started in 2007 and continued at an accelerated pace in 2008 and 2009.

HR

The corporate function dealing with all aspects of managing personnel.

IMF

The International Monetary Fund, a supranational institution aimed at overseeing the global financial system. The IMF is often involved when countries are in financial distress, providing loans and/or guarantees, but often also imposing changes in a country's fiscal policy in return for the help provided.

Import

The goods and services a country buys that are not produced on its soil but in other countries (exporter).

Income Statement

A company's records on a period's activity, typically for a quarter or a year, showing all revenues and expenses incurred during that period, and the resulting profit (or loss).

An asset in a company balance sheet that has no physical appearance but nevertheless is attributed some value. Intangibles may include intellectual property rights such as patents or brands, software, but also goodwill.

Inventory

A company's stock of goods, typically shown as an asset in the balance sheet. Inventory may include raw materials, half-finished goods, parts purchased by third parties or finished goods (either to be sold or taken back after a lease ended). Inventory can be manipulated very easily to show higher or lower values than a 'true and fair view' would demand.

A term used to describe the use of debt to increase the amount of funds available to do business or to invest. A company with equity or $10m and debt of $20m has $30m to do business with. Or a home buyer with equity of $100'000 may borrow $400'000 to buy a house worth $500'000, thus leveraging his initial equity by a factor of 5.

Liability

An obligation to deliver or to pay to a third party, be it in money or in goods.

The amount of cash or cash-equivalents available to an individual or a company. Typically, everything that can be turned into cash immediately is considered liquid. This includes deposits, publicly traded securities and other similar items.

Macroeconomics

The field of economic sciences dealing with the functions of entire economies (countries, regions, etc), looking at aspects like prices, trade, GDP, employment etc.

Margin

the difference between input and output. Often used for the difference between revenue and cost of a product or a service. In finance, multiple uses exist for the term. The interest margin determines the difference between interest banks have to pay and what they can lend for. Margin is also used as the term for collateral pledged by a borrower for a loan.

Mark-to-market

The valuation of (mostly) securities according to their current market value. When a bank (or any other holder of a security) marks its value according to market, it is valued according to what the market currently would pay for that security. This can lead to significant fluctuations. The alternative approach is to mark to maturity, e.g. to value a security according to the value it will yield once it matures, e.g. the borrower will pay it back.

Microeconomics

The field of economic science dealing with decisions of individual participants in an economic exchange or decision making process.

Money Supply

The money available in an economy. Various levels are determined, starting from available cash (M0) to broadest definitions including all holdings of money or money equivalents in an economy.

When a government takes over full or majority control of previously private economic activities, property or other assets.

Nominal Value

For bonds, stocks and other certificates, the 100% value at time of issuance and - for most bonds - at redemption. In between, real values might be well below or above nominal values.

Nouriel Roubini

Professor of economics at New York University's Stern School of Business, also chairman of RGE Monitor, an independent economic consulting firm. Roubini was among the first to call the current economic developments unsustainable, pointing out the risks of a major correction. Because of his early warnings that went mostly unheard, he is sometimes also referred to as 'Dr. Doom'.

In finance, this describes the original amount granted as credit, excluding interest.

Private Equity

A term describing an investment model collecting funds from investors, which subsequently are used to purchase, manage and sell equity in companies. Private Equity companies typically operate with significant leverage and quick turnarounds. One characteristic of companies financed by Private Equity often is a significantly increased debt level. This stems from a common practice of Private Equity firms to very quickly again extract their investments after purchasing a stake in a company. This typically happens through debt raised by the purchased company, which subsequently is paid to the owners in the form of a special dividend of fees.

Production Function

A production function describes the relationship between inputs and outputs of economic activities. It typically looks like Y = Lα x Kβ (simplified), where Y is the output, L is (human) labor input and K capital (e.g. the inputs purchased with money). The α and β factors describe (increasing) elasticities driven by technology driven gains.

R&D

Research and development activities - e.g. the activities leading to innovation and gradual improvement of products and services.

Rating Agency

An agency defining the credit rating of an economic entity, such as companies, countries, but also individual pieces of debt, such as asset backed securities.

defined by most economists as the contraction of an economy for more than two consecutive quarters, measured as a reduction of gross domestic product.

Reserve Currency

A currency used not only to pay for goods and services but also to put savings in. Typical reserve currencies are the U.S. dollar, the Euro and partially Swiss Franc and Yen. Prior to the Euro introduction, the German Mark had the role of reserve currency for a significant portion of Eastern Europe.

Revenue

The money and accounts receivables generated by companies for goods and services sold.

A method employed by companies and governments to raise cash. It involves the sale of an asset (for example a building, a factory, or a public services company) to an investor for cash, combined with a long term lease contract that generates monthly or annual payments to that investor. This method generates short term cash, but creates additional liabilities in the future, which typically are not accounted for.

Securitized Debt

A pool of financial assets (typically debt) that gets packaged into securities that can be sold to investors. Mostly, those securities earn interest and repay the principal amount at the end of a defined term.

Share

In economic terms this describes an equity stake in a company. A shareholder owns a fraction of that company. In other context it often describes a part of an entire group of things.

Thanks to the economic crisis, unfortunately most people now know what a trillion is, but we thought we'd put it in here just so you can enjoy the sheer optical impact of all those zeros: 1 000 000 000 000. Also, this is limited to areas where the United States nomenclature is used (which is most of finance), other countries and systems might refer to this same number of zeros (12) as a billion, and account for a U.S. billion as a "milliard" (9 zeros).